ECON111:

Mathematics for Economics and Business

(Nonlinear Functions (1/2))

Dr Yigit Oezcelik

[email protected]
Management School (ULMS)

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Outline

We review quadratic functions and see some economics and

business applications
Quadratic functions
Graphs of quadratic functions
Quadratic supply and demand functions
Quadratic revenue, cost, and profit functions
Reading: Renshaw Chapter 4, ”Quadratic Equations”

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 Quadratic Functions

Quadratic Functions

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 Quadratic Functions Quadratic Functions

Quadratic Functions (1/3)

So far, our economic analysis has been very simplistic (all linear).
Non-linear relationship can be more reasonable.
An important class of non-linear functions is the quadratic
function:
y = f (x) = ax2 + bx + c,

e.g. f (x) = 2x2 + 8x + 5.

We will review how to solve x for quadratic equation f(x) = 0.
We will review how to sketch graphs of quadratic functions.
We will see their applications to demand and supply analysis.
We will also see their applications to total revenue, total cost
and profit calculations.
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 Quadratic Functions Quadratic Functions

Quadratic Function (2/3)

How can we solve x, when the general quadratic equation that

takes the form:
f (x) = ax2 + bx + c = 0?

We can use factorisation to solve for the roots x (if possible).

We can also use the roots of quadratic equations formula

√
−b ± b2 − 4ac
x1,2 =
2a
√ √
2 2
where x1 = −b+ 2ab −4ac and x2 = −b− 2ab −4ac
Example: Solve for the roots of equation 2x2 + 9x + 5 = 0.

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 Quadratic Functions Quadratic Functions

Quadratic Function (3/3)

Example: Solve for the roots of equation 2x2 + 9x + 5 = 0.

Solution: Comparing this to the general quadratic equation we
note that a =2, b = 9 and c = 5.
Using the roots of quadratic equations formula it follows:

√ √
−9 ± 92 − 4 · 2 · 5 −9 ± 41
x1,2 = = .
2·2 4
√ √
x1 = −9+4 41 and x2 = −9−4 41
Note, a special case of a quadratic equation is ax2 + c = 0, e.g.
2x2 − 8 = 0.

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 Quadratic Functions Graphs of Quadratic Functions

Graphs of Quadratic Functions (1/4)

The graph of a quadratic function is a symmetrical parabola.

b
The axis of symmetry is x = − 2a .
The maximum or maximum of the curve occurs at the axis of
b
symmetry, i.e. when x = − 2a .
The graph has a ”U-shape” (happy face) if a > 0.
The graph has a ”inverted U-shape” (sad face) if a < 0.
The curve intersects the y-axis when x = 0 (i.e. y = c). This
point (0,c) is known as the y intercept.
The curve intersects the x-axis when y = 0 (i.e. solve the
quadratic equation y = 0 by using the roots of quadratic
equations formula). This point is known as the x intercept.

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 Quadratic Functions Graphs of Quadratic Functions

Graphs of Quadratic Functions (2/4)

The following three main steps can be taken to plot the graph of
a quadratic function:
1.) Determine the y and x intercepts:
Find the y intercept by making x = 0.
Find the x intercept by setting y = 0 and solve for roots x.
2.) Determine the shape of the graph:
The graph has a ”U-shape” if a > 0.
The graph has a ”inverted U-shape” if a < 0.
3.) Determine the coordinates of the maximum or minimum
point:
b
Apply the formula x = − 2a to get x coordinate.
Find the corresponding y by substituting the determined
b
x = − 2a value into the quadratic function.

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 Quadratic Functions Graphs of Quadratic Functions

Graphs of Quadratic Functions (3/4)

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 Quadratic Functions Graphs of Quadratic Functions

Graphs of Quadratic Functions (4/4)

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 Quadratic Functions Roots and Graphs

Relation between Graphs and Roots

The quadratic equation ax2 + bx + c = 0 will have

two different roots, if the graph intersects the x axis at two
different points, i.e. graphs A (when a > 0) and A’ (when
a < 0).
two identical roots (effectively one root), if the graph intersects
the x axis at a single point (i.e. tangent to the x axis), i.e.
graphs B (when a > 0) and B’ (when a < 0).
no (real) roots, if the graph does not intersect the x axis, i.e.
graphs C (when a > 0) and C’ (when a < 0).
Note: In our module, we do not consider complex numbers.
We have now reviewed main theoretical results for quadratic
functions.

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 Quadratic Functions Applications

Quadratic Supply and Demand (1/4)

We now study quadratic function applications in economics and

business.
Both supply and demand functions can be non-linear.
For simplicity, assume a quadratic demand function and a linear
supply function:

PD = 1.5Q2 − 15Q + 35

PS = 2Q + 7.
Same as in the linear demand and supply case, the demand and
supply curves can be plotted for analysis.

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 Quadratic Functions Applications

Quadratic Supply and Demand (2/4)

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 Quadratic Functions Applications

Quadratic Supply and Demand (3/4)

The market equilibrium can be found as before, by equating the
demand and supply equations PD = PS :
PD = 1.5Q2 − 15Q + 35 = 2Q + 7 = PS
1.5Q2 − 15Q + 35 = 2Q + 7.
This rearranges to a quadratic equation 1.5Q2 − 17Q + 28 = 0,
which can be solved using the quadratic formula.
This generates two solutions: Q = 2 and Q = 9.333.
But Q = 9.333 can be ignored as it constitutes the part of the
graph where the demand curve cuts upwards and is therefore
invalid.
Use Q = 2 to find the equilibrium price as before (supply)
PS = 2Q + 7 = 2 · 2 + 7 = 11.

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 Quadratic Functions Applications

Quadratic Supply and Demand (4/4)

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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (1/9)

Note the following economic and business concepts:
Total Revenue = Price · Quantity
T R = P · Q.

Total Cost = Average Cost · Quantity

T C = AC · Q.

Alternatively, Total Cost = Fixed Cost + Variable Cost.

Profit = Total Revenue - Total Cost
π = T R − T C.

Break-even: TR = TC, i.e. π = 0

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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (2/9)

Example: A demand function is given by P = 100 − 2Q. Plot
the TR curve.
By definition, the total revenue TR is:
T R = P · Q = (100 − 2Q) · Q = 100Q − 2Q2 .
This function is of quadratic form with a = −2, b = 100 and
c = 0.
The graph would be an inverted U-Shape as a < 0.
It crosses the TR-axis (i.e. y-axis) at the origin as c = 0.
It cuts the Q-axis (i.e. x-axis) when T R = 0, i.e.
0 = 100Q − 2Q2 .
Solve for Q using factorisation (or, quadratic equation formula):
0 = 100Q − 2Q2 =⇒ 0 = 2Q(50 − Q) =⇒ Q = 0 & Q = 50.

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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (3/9)

By symmetry, the quadratic curve reaches its maximum at its
b
axis of symmetry Q = − 2a = 25. We then use this to calculate
total revenue at that point:
T R = 100 · 25 − 2 · 252 = 1250.

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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (4/9)

Similarly, the total cost function can be quadratic:

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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (5/9)

Given the demand and average cost functions, we can analyse

the revenue, cost and profit jointly, as the following example
illustrates.
Example: Consider following demand function P (Q) and
Average Cost function AC(Q):
25
P (Q) = 40 − 2Q AC(Q) = + 4,
Q
where the average cost function is simply the total cost divided
by the quantity Q.
Find a formula for the profit as a function of Q.

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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (6/9)

Solution: By definition, the profit function is the difference

between total revenue and total cost. It follows
T R = P · Q = (40 − 2Q) · Q = 40Q − 2Q2

25
T C = AC · Q = ( + 4) · Q = 25 + 4Q
Q

π = T R − T C = (40Q − 2Q2 ) − (25 + 4Q)

= −2Q2 + 36Q − 25.

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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (7/9)

Find where the curve would cut the respective axes.
Solution: The curve cuts the profit (π) axis at π = −25, when
Q = 0.
The quadratic curve cuts the Q axis when profit equals zero:
0 = π = −2Q2 + 36Q − 25.
Using the quadratic formula solves

p
−36 ± 362 − 4 · (−2) · (−25)
Q1,2 = = 9 ± 8.27647.
2 · (−2)

So, the curve cuts the Q axis at Q1 = 9 − 8.27647 = 0.724 and

Q2 = 9 + 8.27647 = 17.276, respectively.
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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (8/9)

What are the profit maximising quantity Q and maximum profit
π?
Solution: The optimum point of a quadratic function occurs at
the axis of symmetry, which is
b 36
Q=− =− = 9,
2a 2 · (−2)
and the resulting maximum profit is

π = −2 · 92 + 36 · 9 − 25 = 137.

Thus the profit maximising quantity Q and maximum profit π

are 9 and 137, respectively.
The results are depicted in the graph on the next slide.
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 Quadratic Functions Applications

Quadratic Revenue, Cost and Profit (9/9)

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 Quadratic Functions Applications

Thank you!
Do you have any questions?
[email protected]

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